Research

Absolute Return Funds (ARFs) returned on
average 3.2% for the month of November and
have returned an impressive 9.5% year to
date. Eurekahedge has over 150 funds listed
in its Absolute Return Fund Database, where
funds are categorised into Bottom Up, Top
Down, Dual Approach and Diversified Debt.
Among these strategies, Dual Approach funds,
which combine a value, fundamental-driven
stock picking approach with more top-down
macro exposure than Bottom-Up funds, achieved
the best returns - 5.03% - in November.
Most of these gains came from emerging markets
in India, the Baltic States and the Asia
Pacific.

Strategy

% Reporting1

Percent Return

Last 3 Months2

YTD Return2

2003 Return

Dual Approach3

38%

5.03

5.52

6.52

43.55

Top-Down4

17%

4.05

3.41

6.41

27.54

Bottom-Up5

59%

2.97

7.39

11.34

46.54

Diversified Debt6

36%

0.95

4.43

9.23

18.60

Average

49%

3.20

6.08

9.50

40.12

The year's most generous returns came from
the Baltic States. Based on our database,
ARFs invested in the Baltic region gained
6.77% in November. The CEE3 countries such
as Poland, the Czech Republic and Hungary
have gained well over 50% this year, while
the entire Baltic region was up 28.36% for
the year (and 74.7% in 2003). These returns
are due largely to companies in the region
that continue to expand through acquisitions
and yet retain growing profit margins. Baltic
countries are working hard to push down
budget deficits below 3% in line with Eurozone
requirements, and will likely benefit from
continued economic integration with Western
Europe.

Geographical Mandate

% Reporting1

Percent Return

Last 3 Months1

YTD Return2

2003 Return

Asia ex Japan

65%

7.88

6.34

3.68

38.75

The Baltic

100%

6.77

11.75

28.36

74.70

Asia inc Japan

44%

5.94

3.98

0.30

51.97

Greater China

29%

5.65

2.81

-3.32

74.30

Global

88%

3.38

2.07

5.48

30.62

Japan

58%

2.82

-3.59

11.00

35.48

Emerging Markets

41%

2.45

7.07

8.22

37.91

Eastern Europe

57%

-0.22

15.02

28.96

43.04

Russia

90%

-5.91

24.48

22.18

62.69

Average

49%

3.20

6.08

9.50

40.12

While European countries farther east were
hurt by unrest in nearby Ukraine and former
Soviet satellite states in November, the
region's success is on par with the Baltic
States - ARF returns have been upward of
28% for the year there as well. Our database
shows that Russian-allocated funds have
returned 24.48% over the last three months
and have been an emerging market hotspot
all year, but saw an abrupt turnaround in
November with the recent political turmoil
in the Ukraine and the impending collapse
of Russian oil giant Yukos. The Russian
mandate lost 5.91% for the month.

Asia Pacific-focused funds, both Top-Down
and Bottom-Up strategies, benefited across
the board from the declining dollar and
the continued strength in equities in all
countries - Indonesia, Hong Kong and Korea
were particularly buoyant in November. Overall,
the ARFs allocated to the Asia Pacific ex-Japan
region gained 7.88% in November. Japan,
Taiwan and Korea, however, owe their returns
mostly to differentials between their local
currencies and the sinking dollar. Funds
invested in this region continued to gain
from increased liquidity in their markets
as funds flowed away from the US dollar.
Clearly, China is the engine behind Asian
growth, although the slowed economy and
likely revaluation of the yuan given dollar
weakness is putting pressure on local manufacturers.

The parallel growth stories and increasing
wealth gaps in both China and India provide
interesting comparisons for emerging market
managers. India's firm educational system
and English proficiency provide a distinct
contrast to China, which boasts better manufacturing
infrastructure and production efficiency
but whose economic, political, and educational
frameworks are much less stable. Going forward,
China's concerns over its long anticipated
hard landing seem to have abated a bit,
while the country's rampant GDP growth translates
into perennial profitability for managers
- absolute return funds allocated to the
greater China region returned 5.65% for
the month of November. Provided that the
recent incident concerning Singapore-listed
China Aviation Oil's disguised losses on
oil speculation does not foment a string
of debilitating scandals and confirm investors'
fears of China's opaque corporate balance
sheets, the country should continue to drive
export-led economies in the region and attract
investment from abroad. This growth will
continue to propel Asia-Pacific indices,
which have a difficult journey ahead in
2005 to sustain the impressive record established
this year.

3
The use of both Bottom-Up and Top-Down while undertaking securities selection and asset allocation. Normally emphasis is on Bottom-Up. This style can be thought of as an obvious stock-picking approach with a macro overlay.

4
Managers base their holding decisions largely on country, region and sector selection, credit creation and other major macro considerations. Portfolios typically consist of a blend of debt and equity. Rigorous tests of businesses are also conducted, in similar fashion to Bottom-Up, although growth is the Manager's priority.

5
A value-based investment approach. Managers focused on stocks are "true" stock pickers owing to their in-depth use of fundamental analysis of individual securities. Effort is made to find mis-pricing opportunities (undervalued assets) and growth companies via company visits and scrutiny of accounting practices.

6
The Manager attempts to capitalise on expectations of credit improvement in a mix or some of distressed, high-yield, sovereign, corporate and bank debt. Profitability depends on tightening of credit spreads. Convertible bonds (equity) can also be held.

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